Financial Reform D.O.A. Redux

The Financial Reform Bill is now officially a joke. D.O.A. After the worst financial meltdown and still no jobs in the aftermath, we get...lobbyists getting their way in Congress.

The Lincoln derivatives amendment was weakened and watered down. Banks now can keep most of their derivatives. They do not have to spin off 92% of them to affiliate companies.

Under the agreement, reached late Thursday, banks would continue to be allowed to deal interest rate and foreign exchange swaps, "credit derivatives referencing investment-grade entities that are cleared," derivatives referencing gold and silver, and the firms would be allowed to hedge "for the banks' own risk."

Banks would be forced to push out to their affiliates derivatives referencing "cleared and uncleared commodities, energies and metals (with the exception of gold and silver), agriculture, credit derivatives referencing non-investment grade entities and all equities, and any uncleared credit default swaps," Peterson said.

"Frankly, the biggest part of all these derivatives, by far, are the ones that I named that are going to be able to stay in the bank," Peterson added. "Interest rate and foreign exchange are by far the greatest part of the amount of business that's involved here."

From Bloomberg:

The final agreement provides a number of exemptions: Banks can continue trading derivatives used to hedge their risks and can keep trading interest-rate and foreign-exchange contracts. Banks will have up to two years to move other types of derivatives, such as credit default swaps that aren’t standard enough to be cleared through a central counterparty, into a separately capitalized subsidiary.

97% of Market

U.S. commercial banks held derivatives with a notional value of $216.5 trillion in the first quarter, of which 92 percent were interest-rate or foreign-exchange derivatives, according to the Office of the Comptroller of the Currency. The five U.S. banks with the biggest holdings of derivatives -- JPMorgan, Goldman Sachs, Bank of America, Citigroup and Wells Fargo -- hold $209 trillion, or 97 percent of the total, the OCC said.

The Volcker rule, which was to stop banks from gambling with your money, was also shredded like wood in a chipper. Now banks can gamble invest 3% of their Tier 1 capital in speculative ventures. This is more than what the large banks currently hold.

Huffington Post cranked some numbers and shows this actually increases banks' hedge fund and private equity fund speculative activities.

Using JPMorgan Chase, the nation's second-largest bank by assets with more than $2.1 trillion, as an example, the bank would be able to invest an additional 40 percent of its cash, or an extra $1.1 billion for a total of $4 billion.

For Bank of America, the nation's largest bank with more than $2.3 trillion, that change allows the firm to invest more than $4.8 billion in hedge and private equity funds, an increase of 80 percent, according to the bank's 2009 annual filing with the SEC. Morgan Stanley can invest $1.4 billion, a 58 percent increase, while Goldman Sachs can invest $1.9 billion, an increase of just 10 percent, securities filings show.

Even more absurd, the New York Times has a fluff piece claiming this is the strongest piece of legislation since the Great Depression. They should be hammering on this administration and Congress for being so corrupt they cannot fix the largest financial ponzi scheme since 1929.

For other loopholes and water downs read Financial Reform D.O.A..

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Comments

the press reporting on this bill is pure fiction!

It's astounding. I'm watching ABC news and they are just lying their heads off on what is in this bill. It's unbelievable. So, now only did lobbyists ruin financial reform the press is busying spreading outright lies about what the bill does.

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FDIC Sheila Bair WSJ interview

By way of Economists View

Of course she thinks the Financial reform bill is enough, but it is true much is less up to regulators..

But one thing I noticed in this interview is the FDIC scaling insurance fees for the deposit insurance fund to executive compensation and corporate governance.

As you probably know, we've had zero reforms on executive compensation, corporate governance and it's obviously a new executive class pig fest..

So, this is very interesting that the FDIC would take it on and tie it to insurance fund costs.

Silver linings in massive storm clouds.

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I'm convinced most reports did not follow financial reform

I have read so many press reports claiming the Volcker rule is stronger, derivatives are now shuttered off, separate from banking and things that are assuredly plain wrong, all in praise of the bill.

Frankly, I think we'll need to read the actual language, but most of these reports are amazingly wrong.

Meanwhile Baseline Scenario has a great post up on how Jamie Dixon's new strategy will be to become so globally intertwined, so much larger, so much more diverse, there is no way Chase could be taken down and of course would be bailed out.

Frankly it's probably true.

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Baseline Scenario-Standing on the Yellowstone Caldera

The Intertwining scenario is correct. I am doubly sure that the paranoia towards rational forms economic stimulus is due to the $6Trillion hole (undisclosed asset(s) classes) in U.S. International Accounts. Look at it in black an white in the BEA tab on the right. In 2008 and 2009, the Fed loaned $6 Trillion to international banks to cover the losses for CDS Derivatives. This is not sustainable. That said, there is plenty of money to finance stimulus from a variety of sources, TARP repayments, unspent stimulus funds, increasing M3 as small business loans.

In historical terms, there is this eerie similarity to the scandal of the French Crown Jewels in the 1780s. When the people learned the Crown Jewels were pawned anger was immediately directed to Louis XV and the Aristocracy in 1787. Louis had put France in hock to Holland, Spain for financing the American Revolution to the tune of Trillions of dollars. At home the ordinary French were starving and rioted against the grain speculators and the financiers. Major trading companies went bankrupt and Louis XV bailed out the trading companies.

But for the Aristocracy, the party just kept rolling (watch Dangerous Liasons), and the resentment against the rich just kept increasing. The reformers pleaded with the Aristocracy to return the nation to the democracy of the 1614 Constitution, and by May of 1789, all reform failed, before the June Riots and the Bastille in July of 1789.

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Burton Leed

it's hard to keep track on total bail out amounts

Last tally I've got is $6.4 trillion just the Federal Reserve, but that isn't all CDSes. I'm actually not sure of just the CDS tally.

It's $1.25 trillion for MBS, or mortgage backed securities that they "bought" from Fannie and Freddie, or GSE MBS. Then TALF or consumer loan backed securities is another $1 trillion. These things are CDOs and packaged up mortgages and loans in bundles with those tranches.

A CDS is an insurance bet against a CDO (as an example).

These are already unfathomable numbers. Supposedly the claim is they are "holding" these until they "go up in value" and so on.

Then zero interest rates (in effect) have allow banks to borrow and turn around, buy U.S. treasuries and make a killing off of the spread.

That is one good thing on the financial reform bill, there will be at least some audit of the Federal Reserve.

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$6.4 Trillion - The CDS Defaults

The numbers on the U.S. International accounts show the combined CDS losses for 2008 and 2009. These were the international defaults.

The losses were securitized by Fed money, loans, Treasuries. There were just more liabilities than assets. The assets are just a plug on the U.S. accounts - $6.4 Trillion.

Besides you, me, who is saying $6.4 Trillion? I keep hearing the $2.07 Trillion from Sen. Gregg and Sen. Sanders.

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Burton Leed

CNN, Pro Republica, WSJ, etc.

I linked to the bail out tracker that CNN has and I've seen the same number on other news sites tracking the bail out. That's the total tally for the Federal Reserve. That's not losses, that's what's laid out there. Sanders, Gregg are probably talking about a part of it, it's $1.25 trillion in MBS.

I need a link to show CDSes alone were for that's not a number I have seen.

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12 years to "comply"

This is incredible, firstly the bill does not really limit private equity and hedge funds but of the little it might, they have 12 years, or until 2022 to "comply".

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Guess what? Bank Fee replaced with taxpayer money

$11 billion, claiming it's an "accounting adjustment" but taking it from TARP to pay for the bill. Supposedly to "secure votes".

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